Prepared remarks as delivered Dr Ibrahim Al-Muhanna, Advisor to the Minister of Petroleum and Mineral Resources for Saudi Arabia, at the March 15 Institute of International Finance Spring Membership Meeting [14].
The Global Energy Outlook
Ladies and gentlemen.
It is good to be back with you in Doha. Thank you for inviting me to speak about the international oil market. As you all know, the oil market keeps changing, the price fluctuates and supply and demand are constantly shifting. Most of the time, the change in the oil price is small, other times it is large. During the past 40 years, the oil price has sharply risen or fallen at least 12 times, half of which was due to reasons such as politics, war, natural disasters or sanctions. The other half were due to market forces, which includes oil producer policy, such as production cuts or increases, strong economic growth or slowdown, or due to various financial crises.
In June 2014, just nine months ago, the oil price stood at around $115 a barrel. It then fell to just over $45 last January. Nobody anticipated this price fall, or the speed at which it fell. And despite an army of experts and analysts who would like you to think otherwise, no one can accurately predict what the future holds. We all have expectations – but the chance of being wrong is the same as being proved correct. One thing is certain: rapid price movements are not healthy for producers or consumers, or the oil industry, or indeed the banks.
Ladies and gentlemen. A few weeks ago, in Riyadh, I was at a small, private function along with the British central bank governor, Mark Carney. Mr Carney asked me two questions. First, why did the oil price drop? And the second, where is the price heading?
I will tell you today what I said to him then.
I do not believe the fundamentals of supply and demand justified the sudden and rapid price fall during the second half of last year. The market was balanced, and commercial stocks were within their normal range. Yes, supply was starting to increase, but demand remained strong and there was not a very sudden rise in commercial stocks.
I believe the price fall can be put down to expectation and speculation. It was not about fundamentals. It reminded us of 2008, when all the speculation was that we were running out of oil resources and limited production capacity. The recent price fall was due largely to expectation and perception about future supply and demand. Also similar is the wrong assumptions of changing Saudi oil policy, and the ever-present – and incorrect – belief in conspiracy theories.
So let me set out some of the events that had an impact. By late-June, 2014, some forecasts talked of over-supply by the end of the year, and into 2015. The price started to go down slowly to $100, and then to $90 during the following month. In October 2014, a senior OPEC official was asked, at a private dinner in New York, if he thought prices would drop to $80. He said anything is possible but, if it happened, many oil producing countries could handle it. During the same week, in London, another official was asked the same question and he gave a similar answer. Then rumors began to circulate that Saudi Arabia, and perhaps some OPEC producers, wanted lower prices. People started to speculate as to why this may be. And strange and wrong assumptions started to go around. Many analysts started to focus on political reasons, instead of economic ones, such as planning to harm other nations for political goals.
In the same month, there was another incorrect assumption. Saudi Aramco changed its price formula for Asia. A leading US newspaper report specifically used the phrase “price war”, saying Gulf producers were at war on prices. These Aramco prices, by the way, rise and fall, month by month, and are driven purely by business imperatives. Saudi Aramco has never been in a price war with anyone. Then an article by Thomas Friedman suggested Saudi Arabia’s policy – in coordination with the Obama administration - was aimed at hurting Russia by lowering the oil price. This idea was a rehash of assumptions that first reasoned the oil fall of the 1980s. All complete fantasy.
As often happens, many commentators confused cause and effect. Are lower prices bad news for Russia? Yes. Is it bad for Saudi Arabia? Yes. Is it bad for the industry? Yes. Does Saudi Arabia set the oil price? No.
Did it cause the lower price for political or economic goals? No. Claims to the contrary are untrue, full stop. Yet rumors and conspiracy theories grew bigger and bigger, and the oil price was going down. We tried to stress the facts on the grounds but it wasn’t easy to convince people. A herd mentality took over.
In early November, Minister Naimi visited Venezuela for a climate meeting, and also met with the Venezuelan foreign minister, Mr Ramirez. He was keen for concerted action in terms of production and was soon on a globe-trotting mission to attempts to convince other OPEC and non-OPEC producers that this was the way forward. He had our support.
On November 25, 2014, one day ahead of the OPEC meeting in Vienna, Saudi Arabia, Venezuela, Mexico and Russia had a private meeting to discuss possible joint production cuts. Neither non-OPEC producer was prepared to cut. They have their own reasons. So OPEC took a bold decision. In the current circumstances, it could not act alone. It agreed to keep the same production level and to let the market balance itself.
Soon after the OPEC meeting, various theories were put forward about OPEC’s and Saudi Arabia’s intentions. The conspiracy theory shifted completely. From being against Russia and/or Iran, to being all about hurting US shale oil production. And others said OPEC was dead! It was like staring into a mirage. It was all nonsense but it does have an impact on the direction of the oil price, at least for a couple of weeks.
Ladies and gentlemen. I will now talk about the second question put to me by Governor Mark Carney: where’s the oil price heading? Minister Naimi is often asked this question and he replies: if he knew the answer, he’d be in Las Vegas. None of us know the future.
Once the conspiracy theories lost their allure, serious commentators got back to the fundamentals, and the price started to stabilize around $60 during the past few weeks. With this in mind, I have reasons to be optimistic. It’s my view that optimistic and positive people are more right than wrong. I’m confident that demand is, and will be, stronger. I’m also confident that supplies will be just sufficient to meet demand and that prices will firm up.
Why am I confident in both the short and long term? First, I believe the global economy will continue to grow, especially in emerging and developing countries. Second, the global population will continue to increase and third, day after day thousands of people enter the middle classes and this will further increase demand for energy. Europe may be the exception, but overall the global picture remains positive.
The problem, as I stated at the outset, is wild price swings, up or down. These are no good for producers, consumers or investors. Oil is a long-term business, requiring long-term plans and long-term investor confidence.
As I said, I do not believe the recent huge price drop is justified only by a change in fundamentals. As with all markets, there is an element of herd mentality that can often take over. One thing that will never be in short supply is analysts predicting the worst. Some want to take extreme views for their work to be read, noticed, and get quoted.
While keeping optimistic about the future oil market, we have to keep in mind that oil prices, and supply and demand, are ever changing. The best way to minimize their negative impact is to resist the conspiracy theories and correct the misinformation.
Saudi Arabia is, and remains, committed to stable oil prices that are fair for producers and consumers, and fair for the global industry and global economy. We want a transparent and balanced oil market. We seek to meet the demands of our customers. We have a long-term view, and we do not make knee-jerk reactions to headlines.
Thank you for listening.
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And now a special challenge for Zero Hedge readers: spot the number of lies uttered by the advisor in the text above. We exclude his repeat denials of the "conspiracy theories" - those don't count.
